Beginner’s Guide: What is ERC20?

If you are following Ethereum, you might have heard about “ERC20.” It is closely related to the ICOs that keeps happening all around the year. In today’s article, we will focus on answering one of the famous questions, “What is ERC20”

Startups, especially are taking advantage of the ERC20 token. Many startups are also successful in raising millions of dollars through the token sale. However, that’s not the focus of our article. We are here to understand how ERC20 works and its role in the Ethereum blockchain.

What is the definition of ERC20?

ERC20 is defined as the standard protocol for issuing tokens on the Ethereum network. The full-form of ERC20 is “Ethereum Request for Comments.” According to the official sources, the protocol governs the tokens on the Ethereum blockchain. The suffix “20” is used for the sole purpose of representing the unique proposal ID.

If you haven’t heard about Ethereum, we recommend reading “The History of Ethereum.

The main reason why ERC20 became so popular is the fact that it transformed how blockchain operates and functions. Around ERC20, we see and relinquish a market that has grown leaps and bound in the past year or so. Until its release, there was no standardization on how the DApps will work. With its release, the market knows how to release, maintain and implement tokens that work on the platform without any restrictions.

Developers use the ERC20 token to develop their project. It is a way to tokenize their project and at the same time give them a way to raise funds for their project. ICOs is the process of releasing your project to the audience in anticipation that people will fund it and buy the project’s token.

Everything is possible due to ERC20. Starting from standardization to implementation, it plays a significant role. It has undoubtedly overcome the drawbacks of the Bitcoin network.

The co-relation to HTTP Protocol

ERC20 is neither a software, a solution or code. It is a standard protocol just like HTTP. It governs the tokenization and ensures that technical specification of the tokens is meet. If a token doesn’t meet standardization, it won’t be called ERC20 token. If it does, it can be termed as “ERC20 token.”

To ensure that it works as intended, it contains basic functions. If the essential features are not implemented, it will not pass the standardization test. This will mean that it cannot be traded or listed on exchanges as well. Let’s look at the functions below.

All the tokens that are created don’t need to have their blockchain. They can thrive on the Ethereum blockchain, and this is what makes ERC20 so promising and useful.

6 Key Features of ERC20

Six important functions power ERC20. They determine the total supply, sender, allowance, transfer, approve and receiver. All these functions are important and make any token take advantage of the six important functions. Currently, the ERC20 is in draft form. This means that they can be changed or improved on in future.

Benefits of ERC20 Standards

There are many benefits of the ERC20 standards. It makes it possible for developers to develop DApps on the Ethereum blockchain. It also helps streamline the whole standardized process. To get a better view, let’s list the benefits below.

  1. Token implementation becomes easy for developers.
  2. There is a standard protocol to maintain and follow.
  3. ERC20 tokens offer high liquidity.
  4. Smart contracts ensure that transactions are risk-free.

At the time of writing, there are currently 80,000 ERC20 tokens. All of them are running on the Ethereum’s blockchain. Some of the popular tokens include EOS, TRX, VeChain, etc.

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Final Thoughts

ERC20 is one of the best blockchain protocol. It governs thousands of tokens on the Ethereum blockchain. Also, it is developer-friendly. Anyone can create an ERC20 token and release it on the blockchain. The most use-case of ERC20 tokens is by startups. They use it to raise funds through ICOs. However, don’t confuse tokens with cryptocurrency. They are different. Cryptocurrency, generally, have their blockchain. For example, Litecoin, Bitcoin, etc.

ERC20 can also be defined as a way to develop utility tokens for a DApp. All these dynamics lead to issues if you are an investor and is looking to hold tokens for yourself. So, we recommend you to be cautious while investing in any tokens. Proper research can save you an heart-ache later!

So, what do you think about ERC20? Comment below and let us know.

About Author

Nitish holds a BSc in computer engineering. He is a blockchain enthusiast and in spare time likes to read about the moon. His articles have published on Dzone, InfoWorld, and Hongkiat.

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